New plants will slow methanol overcapacity

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Severe overcapacity in the mainland's methanol industry is expected to ease over the next five years as new plant investment becomes more rational and demand holds.

But the degree of respite depends on the pace of new plant construction in the Middle East, since the latter's low natural gas feedstock cost means it is more competitive than China, and any substantial rise in supply from the region would keep more mainland plants idle.

Average operating rates of mainland plants for methanol, a key industrial base chemical and an emerging alternative to petroleum fuel, are forecast to rise to 66 per cent in 2015 from 44 per cent last year as new capacity addition slows markedly, chemical and energy industry information provider ICIS information manager Ken Yin Chenjie told the CBI international methanol conference last week.

Driven by rapid industrialisation and urbanisation that saw methanol demand rise by an average 20 per cent annually in the past decade, the mainland's consumption as a percentage of the global total jumped to 40 per cent in the past 10 years.

Methanol, mostly derived from coal and natural gas, is a key base chemical, whose downstream products are used in manufacturing industries such as textile, electronics and furniture.

Since some of these chemicals are made from crude oil, high oil prices in recent years have seen a rapid rise in development of projects to turn coal into chemicals.

Colourless and smelling like alcohol, methanol is also an emerging alternative clean-burning fuel that can be used on its own or mixed with conventional petrol, although engines must be altered to run with higher proportions of methanol.

A lack of national standards for methanol as a motor fuel has been a stumbling block for driving its demand on the mainland, but ICIS forecast such demand to jump to more than 13 million tonnes in 2015 from 2.6 million tonnes last year.

On the supply side, the mainland's capacity to make the chemical has risen an average 28 per cent annually in the past decade, faster than demand. Its capacity accounted for just under half of the global total last year, up from 10 per cent in 2000.

ICIS expects average annual capacity growth to moderate from 28 per cent in the past 10 years to 9.3 per cent in the next five years, while consumption growth will ease slightly to 17.9 per cent from 19.6 per cent.

This would see the mainland's capacity rise to 55 per cent of the global total in 2015, in line with 57 per cent of demand.

Yin said use of that capacity would largely be determined by supply from Iran, the world's second largest natural gas reserve holder after Russia.

The Middle East's total production cost, inclusive of freight and finance cost, is about half of China's where methanol is made from coal, meaning mainland producers as a group have been loss-making or at best breaking-even briefly, since the financial crisis hit in autumn 2008.

'If all fixed and variable costs are considered, not many [mainland makers] are profitable,' Yin said. 'Most are only in the black on a cash-flow basis.' This means they are not making enough sales to cover fixed costs such as depreciation.

Due to limited gas supply, most mainland producers have to use coal as a feedstock because of its abundance. Coal prices have risen about 9 per cent this year due to higher operating costs and brisk demand.

Yin, who just returned from a visit in Iran, said the gas-rich nation was keen to attract investment from the mainland but concerns about political risks in Iran were a major barrier.

'Only large state companies from China would have the capability to take the risks,' she said, adding no mainland investment in Iran's methanol sector had taken place despite talks being held.

Sarah Mousavi, product manager at partially privatised Iran Petrochemical Commercial, said Iran surpassed Saudi Arabia last year as the world's largest exporter of methanol to China, accounting for 44 per cent of the country's imports.

Depressed demand from developed nations after the global financial crisis saw a flood of low-cost methanol into the mainland market, where imports surged from almost zero in 2007 to 34.8 per cent of consumption in 2009, easing to 26.3 per cent last year.

Cathy Wang Shuyun, international chemical sector consultancy Chemical Market Associates' Shanghai-based associate consultant for methanol, said the mainland's overcapacity problem would persist for years as many project developers were private enterprises which often escaped state scrutiny.

Beijing issued a policy directive in March requiring new projects that turn coal to methanol and its downstream products to have output capacity of at least one million tonnes a year - much higher than most operating plants - in a bid to squeeze out the small players.

'The methanol industry is energy-intensive, pollution-prone and not lucrative, but the developers do not mind because many want control over lucrative upstream coal mining assets,' Wang said, adding many firms with no chemical background had entered the industry.

An example is Datang International Power Generation, a power company that has entered the coal-to-chemical business to access large coal reserves in the north. The firm faced long delays to start production due to technical challenges in the coal gasification process.

'Coal gasification is actually a mature technology, so why the problem? It's probably because it is not a specialist in the sector,' Wang said.